- Measuring progress has been a major riddle for experts. Income as an indicator of progress was tried by many before the idea of the gross domestic product (GDP) was put forward by the US economist Simon Kuznets in 1934. The method tries to calculate (account) a country’s income at domestic and national levels—in gross and net forms—having four clear concepts (GDP, NDP, GNP and NNP)—a brief and objective overview is presented below.
- Gross Domestic Product (GDP) is the value of all final goods and services produced within the boundary of a nation during one year period. For India, this calendar year is from 1st April to 31st March.
- It is also calculated by adding national private consumption, gross investment, government spending and trade balance (exports-minus-imports). The use of the exports-minus-imports factor removes expenditures on imports not produced in the nation and adds expenditures of goods and service produced which are exported but not sold within the country.
- It will be better to understand the terms used in the concept, ‘gross’, which means the same thing in Economics and Commerce as ‘total’ means in Mathematics; ‘domestic’ means all economic activities done within the boundary of a nation/country and by its own capital; ‘product’ is used
to define ‘goods and services’ together, and ‘final’ means the stage of a product after which there is no known chance of value addition in it.
The different uses of the concept of GDP are as given below:
- (i) Per annum percentage change in it is the ‘growth rate’ of an economy. For example, if a country has a GDP of ₹107 which is 7 rupees higher than the last year, it has a growth rate of 7 per cent. When we use the term ‘a growing’ economy, it means that the economy is adding up its income, i.e., in quantitative terms.
- (ii) It is a ‘quantitative’ concept and its volume/size indicates the ‘internal’ strength of the economy. But it does not say anything about the ‘qualitative’ aspects of the goods and services produced.
- (iii) This is the most commonly used data in comparative economics. The GDPs of the member nations are ranked by the IMF at purchasing power parity (PPP). India’s GDP is today 3rd largest in the world at PPP (after China and the USA). , While at the prevailing exchange rate of Rupee (into the US dollars) India’s GDP is ranked 5th largest in the world. [for a detailed discussion on the PPP see Glossary]
Net Domestic Product (NDP)
- Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of ‘depreciation’. This is, basically, the net form of the GDP, i.e., GDP minus the total value of the ‘wear and tear’ (depreciation) that happened in the assets while the goods and services were being produced. Every asset (except human beings) go for depreciation in the process of their uses, which means they ‘wear and tear’. The governments of the economies decide and announce the rates by which assets depreciate (done in India by the Ministry of Commerce and Industry) and a list is published, which is used by different sections of the economy to determine the real levels of depreciation in different assets. For example, a residential house in India has a rate of 1 per cent per annum depreciation, an electric fan has 10 per cent per annum, etc., which is calculated in terms of the asset’s price. This is one way how depreciation is used in economics.
- The other way it is used in the external sector while the domestic currency floats freely as against the foreign currencies. If the value of the domestic currency falls following market mechanism in comparison to a foreign currency, it is a situation of ‘depreciation’ in the domestic currency, calculated in terms of loss in value of the domestic currency.
Thus, NDP = GDP – Depreciation.
- This way, NDP of an economy has to be always lower than its GDP for the same year, since there is no way to cut the depreciation to zero. But mankind has developed several techniques and tools such as ‘ball-bearing’, ‘lubricants’, etc., to cut the loss due to depreciation.
The different uses of the concept of NDP are as given below:
- (a) For domestic use only: to understand the historical situation of the loss due to depreciation to the economy. Also used to understand and analyse the sectoral situation of depreciation in industry and trade in comparative periods.
- (b) To show the achievements of the economy in the area of research and development, which have tried cutting the levels of depreciation in a historical time period. However, NDP is not used in comparative economics, i.e., to compare the economies of the world.
- This is due to different rates of depreciation which is set by the different economies of the world. Rates of depreciation may be based on logic (as it is in the case of houses in India—the cement, bricks, sand and iron rods which are used to build houses in India can sustain it for the coming 100 years, thus the rate of depreciation is fixed at 1 per cent per annum). But it may not be based on a logic all the time, for example, up to February 2000, the rate of depreciation for heavy vehicles (vehicles with 6-wheels and above) was 20 per cent while it was raised to 40 per cent afterwards—to boost the sales of heavy vehicles in the country.
- There was no logic in doubling the rate. Basically, depreciation and its rates are also used by modern governments as a tool of economic policymaking, which is the third way how depreciation is used in economics.
Gross National Product (GNP)
- Gross National Product (GNP) is the GDP of a country added with its ‘income from abroad’. Here, the trans-boundary economic activities of an economy are also taken into account. The items which are counted in the segment ‘Income from Abroad’ are:
- (i) Private Remittances: This is the net outcome of the money which inflows and outflows on account of the ‘private transfers’ by Indian nationals working outside of India (to India) and the foreign nationals working in India (to their home countries). On this front India has always been a gainer- till the early 1990s from the Gulf region (which fell down afterwards in the wake of the heavy country-bound movements of Indians working there due to the Gulf War) and afterwards from the USA and other European nations. As per the World Bank, in 2019 too, India remained the world’s top recipient of remittances (the US $80 billion) followed by China (the US $67 billion), Mexico (the US $34 billion) and the Philippines (the US $26 billion).
- (ii) Interest on External Loans: The net outcome on the front of the interest payments, i.e., the balance of inflow (on the money lent out by the economy) and outflow (on the money borrowed by the economy) of external interests. In India’s case, it has always been negative as the economy has been a ‘net borrower’ from the world economies.
- (iii) External Grants: The net outcome of the external grants i.e., the balance of such grants which flow to and from India. Today, India offers more such grants than it receives. India receives grants (grants or loan-grant mix) from few countries as well as UN bodies (like the UNDP) and offers several developmental and humanitarian grants to foreign nations. In the wake of globalization, grant outflows from India have increased as its economic
diplomacy aims at the playing bigger role at international level.
Ultimately, the balance of all the three components of the ‘Income from Abroad’ segment may turn out to be positive or negative. In India’s case, it has always been negative (due to heavy outflows on account of trade deficits and interest payments on foreign loans). It means, the ‘Income from Abroad’ is subtracted from India’s GDP to calculate its GNP.
- The normal formula is GNP = GDP + Income from Abroad. But it becomes GNP = GDP + (–Income from Abroad), i.e., GDP – Income from Abroad, in the case of India.
- This means that India’s GNP is always lower than its GDP.
The different uses of the concept GNP are as given below:
- (i) It is a more exhaustive concept of national income than the GDP as it indicates towards the ‘quantitative’ as well as the ‘qualitative’ aspects of the economy, i.e., the ‘internal’ as well as the ‘external’ strength of the economy.
- (ii) It enables us to learn several facts about the production behaviour and pattern of an economy, such as, how much the outside world is dependent on its product and how much it depends on the world for the same (numerically shown by the size and net flow of its ‘balance of trade’); what is the standard of its human resource in international parlance (shown by the size and the net flow of its ‘private remittances’); what position it holds regarding financial support from and to the world economies (shown by the net flow of ‘interests’ on external lending/borrowing).
Net National Product (NNP)
- Net National Product (NNP) of an economy is the GNP after deducting the loss due to ‘depreciation’. The formula to derive it may be written like:
NNP = GNP – Depreciation
NNP = GDP + Income from Abroad – Depreciation.
The different uses of the concept of NNP are as given below:
- (i) This is the ‘National Income’ (NI) of an economy. Though, the GDP, NDP and GNP, all are ‘national income’ they are not written with capitalised ‘N’ and ‘I’.
- (ii) This is the purest form of the income of a nation.
- (iii) When we divide NNP by the total population of a nation we get the ‘per capita income’ (PCI) of that nation, i.e., ‘income per head per year’. A very basic point should be noted here that this is the point where the rates of depreciation followed by different nations make a difference. Higher the rates of depre-ciation lower the PCI of the nation (whatever be the reason for it logical or artificial as in the case of depreciation being used as a tool of policymaking). Though, economies are free to fix any rate of depreciation for different
assets, the rates fixed by them make difference when the NI of the nations are compared by the international financial institutions like the IMF, WB, ADB, etc.
- The ‘Base Year’ together with the ‘Methodology’ for calculating the National Accounts were revised by the Central Statistics Office (CSO) in January 2015.